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NEW YORK In November, Facebook’s 23-year-old founder, Mark Zuckerberg, stood on a low stage in Manhattan and made a boast to hundreds of advertisers and agencies that caused more than a few snickers afterwards: “Once every 100 years, the way that media works fundamentally changes.”

In the subsequent weeks, Zuckerberg’s hubris was slammed, particularly when Facebook was forced to backtrack on its plan to pipe product purchases to users’ friends, a system known as Beacon. One writer, former Business 2.0 editor Josh Quittner, even went so far as to title an article, “RIP Facebook?”

Yet despite the hyperbole and inevitable backlash from once-fawning admirers, Zuckerberg’s proclamation has the ring of truth to it when looked at in the wider view. More than ever in the modern era, media and advertising are changing, as epitomized by the rush of middle-aged users to social nets like Facebook. The Internet is finally beginning to live up to its promise to change media and advertising from a one-to-many, passive proposition to a many-to-many experience premised on social connectivity. For media companies and advertisers, this could make Zuckerberg’s irrational exuberance seem not so irrational in retrospect. In fact, the fundamental changes he was referring to are already under way.

“I believe the media business has changed more in the last five years than in the 500 years before that,” Peter Horan, CEO of IAC’s media and advertising unit, told a gathering of publishing, advertiser and agency executives earlier this month.

What’s most changed is how people access information. The Internet has thus far been a search-dominated medium, using faceless algorithms to sort through masses of information for the right link. Google’s role as the starting point of the many users’ Web experience gave rise to what The Search author John Battelle calls “the database of intentions”: people express themselves directly to Google, which can then match up a limitless supply of information to satisfy any need, from a word definition to a retailer selling cashmere sweaters. That’s been a sweet business for Google, which is on pace to rack up over $15 billion in revenue for 2007.

Peer recommendation comes of age

But what comes next? Search, for all its benefits, doesn’t do a great job of helping people separate the wheat from the chaff. The top result for my search is the same as yours.

Many observers see social connections as a credible alternative to search in how we find information, consume media and make product decisions—all premised on the power of peer recommendation. “Social networking is as significant a behavioral shift as search,” says Sarah Fay, CEO of Carat, part of Aegis Group. “The way search has infiltrated our lives, social networking [has become] the fabric of our lives.”

Study after study, not to mention common sense, suggests that when friends recommend a movie, product or event, it has more weight than hearing from a commercial message. Beacon was supposed to morph this premise into an ad vehicle, only to fall flat on privacy concerns. Still, the $15 billion valuation pinned to Facebook is a direct result of the belief it will turn its 58 million-plus users into a formidable advertising opportunity. And other companies are fast at work making this a reality. Archetype Media, for instance, has begun Social Vibe, a marketplace for consumers to get sponsorships (rewards) from brands they endorse within their social networks. Izea, formerly PayPerPost, is building a similar marketplace for bloggers.

The Tay Zonday DIY media model

For months, a Minneapolis graduate student had posted quirky videos to YouTube of himself singing covers and original songs in a remarkably deep voice that didn’t seem to fit his small, youthful appearance. Zonday’s “Chocolate Rain,” first posted in April, generated a tsunami of attention, racking up more than 12 million views.

By the end of the year, Dr Pepper had approached Zonday to record a follow-up version called “Cherry Chocolate Rain” in advance of next year’s introduction of Cherry Chocolate Dr Pepper. Creative merits aside, Zonday brought something else to the table: his own network. Dr Pepper relied on Zonday’s YouTube network of 20,000 subscribers to spread the Dr Pepper video. Within two weeks, it gained more than 1.5 million views. By that time, Zonday had turned himself into a mini-media property, joining a YouTube program that will show ads on his videos and give him a cut.

While the rise of a quirky personality like Tay Zonday is undeniably amusing, the story also points to how social connections on open platforms like YouTube are feeding the process of distributed media. Take Tila Tequila. At the start of the year, she was merely a wannabe model who had an inordinate number of MySpace friends, over 1 million. She was able to parlay her social networking base into a record deal and a top-rated reality show, A Shot at Love With Tila Tequila, on MTV.

Social media is not just about becoming famous. Within their own, much smaller networks, people are becoming media distributors via widgets, tiny Web applications that can be embedded on blogs and social-network profile pages. MySpace has long let users embed photo slide shows, video clips and other tools of self-expression into their pages. Having watched YouTube grow into a force on the back of distribution through the site, it sought earlier this year to exert more control, blocking some widget makers that included advertising. It eventually backed down. Rival Facebook opened its site to outside developers to build widgets that used social data, and now over 10,000 have been created, with the most popular spread friend to friend. By the end of the year, more than 50 percent of Web users encountered a widget monthly, according to comScore, typically through a slide show or video posted to a social network or blog.

In this regard, social networks like Facebook, MySpace and Bebo are likely to spawn millions of mini-networks where content is shared among a trusted circle. “MySpace isn’t a social network with 120 million people,” says Greg Verdino, chief strategy officer at new marketing shop Crayon. “It’s 120 million social networks. There’s a lot of focus on consumer-generated media when there’s more impact on consumer-recommended content.”

Brands have nowhere to hide

As consumers take control of the spreading of media, they invariably have a say over how brands are perceived. Old notions of planning a brand image through commercial messages are running up against consumers actively voicing their opinions to each other in venues as diverse as message boards, consumer reviews, blogs and social networks. Problems can occur when there’s a disconnect between the rosy image dreamed up by marketers and the everyday reality expressed by consumers.

The crossroads the advertising industry stands at was on full display this year in Cannes. Dove won the Film category for “Evolution,” a touching short film by WPP Group’s Ogilvy & Mather that looked at the beauty industry’s false and manipulative notions of beauty. Buoyed by the ad’s impact—”Evolution” has been viewed more than 5.5 million times on YouTube—Dove released a more pointed follow-up in October, “Onslaught,” which shows an angelic little girl deluged by the marketing industry’s messages about beauty. The video met with wide praise from critics and industry types. But then something else happened. A video response was posted to YouTube, pointing out the hypocrisy of Unilever, which owns not only Dove, but Axe—a product that peddles stereotypes of women as little more than sex objects.

Although the video response gathered only a fraction of the views that Dove’s ad did, it showed how brands can get called out on empty promises in an age when connections are paramount. Wal-Mart found that out this year, too. Eager to get involved with social media, it ran a back-to-school campaign on Facebook that fell flat after the brand page was flooded with young critics of the company’s labor practices.

Some brands have taken the criticisms to heart. Back in August 2005, Dell’s customer-service problems drew the ire of blogger Jeff Jarvis. His resulting “Dell Hell” tirade sparked similar stories of shoddy services from dozens of others. Dell responded, after initial fumbling, by forming its own blog and an outreach team to contact those posting negative experiences with its products. The company went even further last February by launching IdeaStorm, a section of its site that solicits ideas from customers and gives them a forum for feedback, positive and negative.

The lesson for brands: The days of papering over poor products with snazzy messages are faltering now that we’re connected. That means the once mundane area of customer service becomes an important definer of the brand experience, says Pete Blackshaw, CMO of Nielsen BuzzMetrics. “That’s unfamiliar terrain for anyone in the marketing business, but it’s low-hanging fruit.”

What’s a friend worth?

But in a year marked by brands’ experimentation in social media, including MySpace profile pages—what Jeremiah Owyang, an analyst with Forrester Research, describes as fishing “where the fish are”—agencies are left with a quandary: How can such voluntary interactions be measured?

It’s often noted that the Internet’s greatest strength is its measurability, but when brands move from counting clicks and site visits to connections, the system breaks down, says Troy Young, CMO of VideoEgg, a social media advertising network that embeds overlay “invitations” into a brand experience. “It’s a real challenge because true engagement cost doesn’t fit into a buyer spreadsheet,” he explains. “The whole media marketplace is priced around the cost of impressions to unengaged users.”

The solution is unclear. For now, the ad industry is left with familiar forms of measurement, mostly clicks and impressions, and what will follow is becoming an ever-important discussion.

The price of all this social connectivity is the inundation of the mundane, from Facebook updates on what groups people join to Twitter messages on what someone had for lunch. And as Beacon showed, the line between what is personal and public is blurring—and sometimes the decision is outside of our control. Yet no matter where the line is drawn, the social trend set in motion this year is likely to only continue.